A review of CPD\\\'s critique of the economy in FY 2014

The paper Bangladesh Economy in FY 2014: Three Months after the Budget, Three Months before the Elections prepared by the Centre for Policy Dialogue (CPD), which was released to the press on October 22, 2013, mainly discusses about (i) what do the final figures of FY 2013 say?; (ii) interpreting the early signals of FY 2014; and (iii) exploring the political business cycle (PBC) in Bangladesh.  
In section 2 under the heading of 'What do the final figures of FY 2013 say', the report says in 2nd paragraph that "…Revenue collection by the NBR (National Board of Revenue) remained Taka 3,644 crore (36.44 billion) lower than the target". However, data from the Finance Division and the NBR show a different scenario. They say that, a small fall in the tax growth is ameliorated by the good growth of non-tax revenue. As a result, the revenue collection scenario is characterised by a growth increased during the preceding three years. The tax-GDP ratio is now around 11.3 per cent. One can also note the share rise in Non-NBR Tax as a share to GDP in FY13. (Table 1 and Table 2)    

In the same section in 4th Paragraph regarding fiscal deficit, this report says that, "…What is to be noted in this connection is that, the financing structure of the budget deficit did not go according to the programme." However it contradicts with the Bangladesh Bank information. It says that, the budget target (revised) for government borrowing from domestic sources fixed at Tk. 324.73 billion (32473 crore) in FY13, of which Tk. 2850 billion (285000 crore) and Tk. 39.73 billion (3973 crore) were targeted for borrowing from banks and other than banks respectively. The government borrowing stood at Tk. 205.965 billion (20596.5 crore) net from the banking system during FY13, which only covered 72.3 per cent of revised budget target. On the other hand, government borrowing stood at Tk. 279.09 billion (2790.9 crore) from other than banks, which covered 70.2 per cent of revised budget target. During FY13 National Savings instruments contributed 27.7 per cent out of total non-bank borrowing. The total government domestic borrowing (banking and non-banking sources) represented only 72.0 per cent of total revised budget target during FY13.
The overall fiscal deficit for FY13 was contained to 3.55 per cent of GDP (gross domestic product) less than 5.0 per cent of threshold considered by the macroeconomists for Bangladesh. Borrowing from the banking system to finance the budget rose sharply in the Q4FY13 ( Tk. 115 billion taka) but overall the Tk. 178-billion borrowing in FY13 was well within the targets of the revised Budget and was less than the Tk. 189 billion of FY12 (source: Bangladesh Bank).
Regarding the overall growth rate it can be said that, the annual average growth rate for the last four years is 6.3 per cent. Compared with the GDP growth of India (5.0 per cent), Pakistan (3.0 per cent), emerging developing countries (5.0 per cent) and the world average (3.1 per cent), during the same period, the achievement of Bangladesh is commendable though the country fell behind the set high target. Growth target set has never been fully attained in Bangladesh history.  
The Crop Production Paragraph of the paper states that, "…Decline in rice production and lack of rice import in FY2013 consequently led to a decline in public food stock by more than 200 thousand MT. One can, thus, assume that the government may have to rely on imported rice to run its food distribution programmes in a significant way in the current fiscal year which will then obviously have additional fiscal consequence. Hence, import of rice by both public and private sector is likely to increase in FY2014." However, over the last four years, rice production has been stabilised in the strong area of 30 million metric tonnes plus. (Table 3) Total rice required for Bangladesh including food, feed, seed wastage and 152 kg rice per head per year for 150 million people is 26.15 million metric tonnes. Hence, surplus is 7.65 million metric tonnes in FY13. Therefore, it can be stated that the country is in the arena of rice self-sufficiency during the normal year, if there is no natural calamities. It has been possible only because of the pro-farmer activities and policies of the present government that ensures inputs (seed, fertiliser, electricity for irrigation) in subsidised prices to the farmers. So CPD's apprehension is not tenable.

In 'Inflation and Monetary Growth' paragraph it is mentioned that the broad money growth came down to 16.7 per cent which according to Bangladesh Bank data is actually 13.2 per cent. The paragraph further indicated the incidence of excessive bank borrowing. However, in reality the bank borrowing was (-) 52.7 per cent less in FY13 than that was in FY12.       
Besides this, data that have shown in the Table 1 needs rechecking. Moreover, in section 2 it has been mentioned that, "On the payment side, import payments declined by (-) 4.1 per cent in FY 2013."  However, the Table below shows that in FY 2013 import payments declined by only (-) 0.1 per cent. CPD's figure is exaggerated.
Moreover, in the same paragraph they showed that the amount of foreign aid disbursement in FY12 and FY13 as 1.2 and 1.9 billion USD respectively. However, the ERD data showed some higher figures 2.1b USD for FY12 and 2.8b USD for FY13. One contradictory information is there as they describe the trend in remittance earning as declining which actually was increasing with a good margin.
Moreover, in the same paragraph they showed that the amount of foreign aid disbursement in FY12 and FY13 as 1.2 and 1.9 billion USD respectively. However, the ERD data showed some higher figures 2.1b USD for FY12 and 2.8b USD for FY13. One contradictory information is there as they describe the trend in remittance earning as declining which actually was increasing with a good margin.
In section 3 "Interpreting the Early Signals of FY 2014", the last line of Revenue Collection Paragraph states "…Nevertheless, it is expected that overall revenue collection at the end of FY 2014 will miss the budgetary target by a substantial margin" contradicts with the last line of Public Expenditure Paragraph (page 9) which depicts "…In fine, in the backdrop of modest growth in revenue collection, substantial increase in revenue expenditure is anticipated in FY 2014."
The NBR sources say that, revenue growth has certainly jumped up particularly from FY11 onwards (Table 4). In the Sixth Five Year Plan (SFYP), average revenue growth has been projected at 21 per cent per annum; the average yearly growth in FY 2012 and FY 2013 has kept that pace.

 
In the SFYP, revenue-GDP ratio has been projected to be 14.6 per cent at the end of plan period, but it is already nearly 14.0 in FY13 and on track to achieve the SFYP target (Table 5). One of the greatest successes of this government is substantial increase of share of revenue to GDP (3.20 per cent) in a period of four years and a half where as an increase of revenue to GDP had been 3.5 per cent over a period of 23 years preceding the period of present government.

In the ADP Implementation Paragraph the paper says that, "…During the first two months of FY 2014, only 6.2 per cent of the allocation has been spent…"; however, this figure will be 7.0 per cent (Table 6) as of IMED (Implementation Monitoring and Evaluation Division) report on ADP (Annual Development Programme) implementation.

 
 In the second line of last Paragraph of the same section, CPD says that, "The early trends of FY 2014 suggest that, while the economy not only did manage to make any significant shift towards a higher growth trajectory, economic stability in at least one key area (i.e. inflation) has deteriorated. While in terms of fiscal deficit the economy is expected to remain within the programmed level, the revealed financing mix will remain inefficient." Regarding inflation it is observed that, according to the new base (2005-06) the point-to-point inflation (general) in FY 2013 was 8.05. However, in the current FY 2014 according to new base the point-to-point inflation in July, August and September are 7.85, 7.39 and 7.13 respectively which shows a declining trend. Regarding financing mix it is too early to make negative comment because, the borrowing plan has been finalized for FY 2014 on the basis of empirical evidence. According to the requirement of expenditure payments with respect to revenue collection of the government, the amount of borrowing to minimize cash mismatch, in each month varies.
Section 4 "Exploring the Political Business Cycle" of CPD's paper tries to explore to what extent Bangladesh's experience confirms existence of dampening Political Business Cycle (PBC) in the country leading to fall in real GDP. In doing this the report has done some analysis from past figures and tested empirically. An Ordinary Least Square (OLS) based regression model was developed. The model uses time series data covering FY1991 to FY2013. It attempts to establish the relationship between the dependent variable and budget deficit, real GDP growth, public consumption, public investment, public borrowing, revenue expenditure and tax revenue. The dependent variables are defined as election year dummy; one year lagged value of election year dummy; one year after the election year dummy and lagged dependent variable. From the analysis the report decides that (page 19), "Our analysis finds evidence in favour of existence of PBC in the context of Bangladesh." However, among all the dependant variables the results of GDP growth, public consumption, public investment, public borrowing, budget deficit, tax revenue and revenue expenditures have been found statistically insignificant. So, from these statistically insignificant results, this type of general comments could not be made. Besides this, from this report it is not clear whether in this regression model the auto correlation (as using lagged variable and time series) and  heteroscedasticity etc. have been addressed or not. So the election-year phenomenon up until now has not influenced GDP growth significantly negatively. Economy runs in cycle and seeing declining trend in any indicator in a quarter may not lead to convergence to annual final outcome. CPD's comments appear more of rhetoric.
Prof. Shamsul Alam is Member, General Economics
Division, Planning Commission.
 [email protected]